How preparers can make revenue recognition implementation smooth

Financial statement preparers are embarking on a daunting task as
they begin to ramp up for implementation of the new, comprehensive,
converged standard on revenue recognition.

Reading and understanding the standard, which was released on
Wednesday, is the first item of business for preparers, according to
Brian Marshall, CPA, a partner in the National Accounting Standards
Group at McGladrey LLP. Even that isn’t easy. The FASB standard weighs
in at 706 pages. Preparers who want printed documents may need to
recruit a forklift operator just to transport the pages back to their
desk. The many pages reveal an uneven distribution of duties for
preparers in different industries, standard setters have said.

But whether companies expect many changes or just a few, experts are
advising companies not to delay their implementation work because it
will be no small undertaking and revenue is such an important item in
financial statements.

Marshall suggested that preparers need to do the following to ensure
an effective implementation:

Consider the requirements in the context of the company’s
revenue streams.

There is a long list of things that may be reported differently under
the new guidance. The timing of revenue recognition could change. New
judgments and estimates may be required. And companies may need to
allocate revenue to performance obligations in different ways from the past.

“In any case, there’s going to be some change,” Marshall said. “It’s
just a question of what that change will be.”

Pay close attention to new disclosure requirements.

Standard setters have said the new, enhanced disclosure requirements
are one of the most important aspects of the standard in terms of
adding value for investors. These disclosure requirements also will
create challenges for preparers.

“One of the things that companies should be considering as they’re
evaluating or mapping out a plan is, do they have the processes and
systems in place to gather that information?” Marshall asked. “Or do
they even have the information that might be required for these
additional disclosures?”

In some cases, Marshall said, companies may not have that
information. So they may have to adopt processes to capture that
information, and they will need controls over any new processes, as
well as around any new judgments that are being made as a result of
the standard’s principles-based focus.

Decide on a transition method.

Companies have two options for transition in the standard, which
takes effect for public companies for reporting periods beginning
after Dec. 15, 2016 (FASB, effectively Jan. 1, 2017, for calendar-year
entities), or reporting periods beginning on or after Jan. 1, 2017
(International Accounting Standards Board). Nonpublic entities will
have an additional year to adopt the new standard.

A full retrospective transition approach would require calendar-year
companies to capture data for dual reporting starting from the
beginning of 2015. An alternative method would not require restatement
of comparative years, but some detailed additional disclosures would
be required, including disclosing in the first year of adoption what
the revenue under the old guidance would have been, to give users some
ability to compare.

Choosing a transition method will be one of the biggest decisions for
companies to make, Marshall said.

“And they’re going to want to make that decision sooner rather than
later,” he said, “because in a perfect world if you do go with a full
retrospective approach, you would want to have a dual-reporting
approach of sorts for what will be the prior periods in the year of
adoption and not wait until 2016 and then say, ‘I’ve got to go back
and adjust all my prior periods and gather that information.’ ”

Prepare public disclosures for required company filings.

In public filings, going forward companies will now have to describe
the standard, when they are required to adopt, and the expected impact
of adoption, Marshall said.

“Obviously, if you’re filing financial statements a month after this
is issued, you’re not going to have a lot of detail on that yet,
because you’re still going through and evaluating the standard,”
Marshall said. “But in the future, those disclosures would have to get
a little more granular and detailed with each filing as you’re
accumulating information about the impact of adoption.”

Consider how to deploy company resources to meet the requirements.

Companies will have to figure out if they have enough resources to
handle implementation—and who should be involved, Marshall said. In
addition to finance and accounting, numerous other functions
may have a role, including information technology, legal, tax,
operations, internal control experts, financial planning and analysis,
and investor relations.

“You’re going to want to have more than just your accounting folks
[involved],” Marshall said. “There may be the initial tendency to say,
‘This is an accounting matter, and only my accounting people are going
to be involved with this.’ That’s not necessarily the case here.”

TAX NEWS

President Barack Obama signed legislation that retroactively extended more than 50 expired tax provisions for 2014, allowing taxpayers to take advantage of a host of tax incentives during this filing season.

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